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Most investors are probably well-aware that the financial markets and investing strategies have become increasingly complex in recent years. Hedge funds have turned to derivatives, interest rate swaps, credit default swaps, packaged mortgages, and other very confusing and complicated instruments to hedge their positions and make 'alpha.'

But as we're seeing recently, more complicated doesn't always mean better, especially in the financial markets. The Financial Times Alphaville Blog recently had an interesting post about this very issue. In fact, this post even drew on biology to explain why simple is better than complex: "Animals that have become more complex, adapting better to their environments, "enjoy greater success for a while, but are less likely to withstand a catastrophe." Sounds familiar, no?

In fact, the blogger goes on to assert that a "crude strategy" such as sticking to stocks, bonds and cash is "more likely to survive a change in the environment." This makes perfect sense, especially for individual investors. For more than half of individual investors (those without the adequate time to research) the crudest investment strategy of all -- buying and holding index funds -- makes the most sense.

Hedge fund investors are going to want to understand what they own if they are blown out. When they realize that exorbitant leverage is primarily the culprit for their weak performance their going to demand lower leverage. When they realize that many of their positions make absolutely no sense to 95% of America, they're going to demand simplicity. As the markets continue to evolve I wouldn't doubt a regression to simpler, more easily understood investments.

Are we turning back the clocks to simple, understandable investments? originally appeared on BloggingStocks on Fri, 17 Aug 2007 17:43:00 EST. Please see our terms for use of feeds.

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